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Policy Uncertainty and Cost of Delaying Reform: The Case of Aging Japan

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  • Sagiri Kitao

    (Keio University)

Abstract

Reform is inevitable in an aging economy with a generous pay-as-you-go social security system. Often, however, the timing and structure of reform are unknown. We explicitly model policy uncertainty in a general equilibrium life-cycle model and let agents update expectations and react as uncertainty is resolved over time. Using the case of Japan, a country facing severe demographic and fiscal challenges, we quantify welfare tradeoff across generations by delaying reform or reducing its scope. Individuals respond to a delay by dis-saving and working less, while facing higher taxes to cover additional expenditures during the transition. Fiscal uncertainty itself has a more significant adverse effect on older individuals, who face greater income risks and a lower return on their retirement savings. (Copyright: Elsevier)

Suggested Citation

  • Sagiri Kitao, 2018. "Policy Uncertainty and Cost of Delaying Reform: The Case of Aging Japan," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 27, pages 81-100, January.
  • Handle: RePEc:red:issued:16-328
    DOI: 10.1016/j.red.2017.11.005
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    1. Huixin Bi & Eric M. Leeper & Campbell Leith, 2013. "Uncertain Fiscal Consolidations," Economic Journal, Royal Economic Society, vol. 0, pages 31-63, February.
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    15. Kitao, Sagiri, 2015. "Fiscal cost of demographic transition in Japan," Journal of Economic Dynamics and Control, Elsevier, vol. 54(C), pages 37-58.
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    17. Selahattin İmrohoroğlu & Sagiri Kitao & Tomoaki Yamada, 2016. "Achieving Fiscal Balance In Japan," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 57, pages 117-154, February.
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    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Policy Uncertainty and the Cost of Delaying Reform: A case of aging Japan
      by Christian Zimmermann in NEP-DGE blog on 2016-02-25 21:03:19

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    Cited by:

    1. Heer, Burkhard & Polito, Vito & Wickens, Michael R., 2020. "Population aging, social security and fiscal limits," Journal of Economic Dynamics and Control, Elsevier, vol. 116(C).
    2. MORIKAWA Masayuki, 2017. "Impact of Policy Uncertainty on Consumption and Saving Behavior: Evidence from a survey on consumers," Discussion papers 17075, Research Institute of Economy, Trade and Industry (RIETI).
    3. Sagiri Kitao, 2017. "When do we Start? Pension reform in ageing Japan," The Japanese Economic Review, Japanese Economic Association, vol. 68(1), pages 26-47, March.
    4. MORIKAWA Masayuki, 2016. "How Uncertain Are Economic Policies? Evidence from a survey on Japanese firms," Policy Discussion Papers 16008, Research Institute of Economy, Trade and Industry (RIETI).
    5. Erin Cottle Hunt, 2021. "Adaptive Learning, Social Security Reform, and Policy Uncertainty," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 53(4), pages 677-714, June.
    6. Keisuke Otsu & Katsuyuki Shibayama, 2018. "Population Aging, Government Policy and the Postwar Japanese Economy," Studies in Economics 1809, School of Economics, University of Kent.
    7. Schön, Matthias, 2019. "Demographic change and the German current account surplus," VfS Annual Conference 2019 (Leipzig): 30 Years after the Fall of the Berlin Wall - Democracy and Market Economy 203527, Verein für Socialpolitik / German Economic Association.
    8. Jouchi Nakajima, 2018. "The role of household debt heterogeneity on consumption: Evidence from Japanese household data," BIS Working Papers 736, Bank for International Settlements.
    9. Nakajima, Jouchi, 2020. "The role of household debt heterogeneity on consumption: Evidence from Japanese household data," Economic Analysis and Policy, Elsevier, vol. 65(C), pages 186-197.
    10. Caliendo, Frank N. & Gorry, Aspen & Slavov, Sita, 2020. "Survival ambiguity and welfare," Journal of Economic Behavior & Organization, Elsevier, vol. 170(C), pages 20-42.
    11. Michuda, Aleksandr, 2018. "Political Contributions and Land Reform Delay: The Case of South Africa," 2018 Annual Meeting, August 5-7, Washington, D.C. 274365, Agricultural and Applied Economics Association.
    12. Kazuki Hiraga & Kengo Nutahara, 2019. "Fragility in modeling consumption tax revenue," CIGS Working Paper Series 19-003E, The Canon Institute for Global Studies.
    13. Erin Cottle Hunt & Frank N. Caliendo, 2020. "Social Security reform: three Rawlsian options," International Tax and Public Finance, Springer;International Institute of Public Finance, vol. 27(6), pages 1582-1607, December.
    14. Schön, Matthias, 2020. "Demographic change and the rate of return in PAYG pension systems," Discussion Papers 57/2020, Deutsche Bundesbank.
    15. Zhang, Yongsheng & Yao, Enjian & Zhang, Rui & Xu, Hao, 2019. "Analysis of elderly people's travel behaviours during the morning peak hours in the context of the free bus programme in Beijing, China," Journal of Transport Geography, Elsevier, vol. 76(C), pages 191-199.
    16. Morikawa, Masayuki, 2016. "How uncertain are economic policies? New evidence from a firm survey," Economic Analysis and Policy, Elsevier, vol. 52(C), pages 114-122.
    17. Paul Ho, 2020. "Estimating the Effects of Demographics on Interest Rates: A Robust Bayesian Perspective," Working Paper 20-14, Federal Reserve Bank of Richmond.
    18. Schön, Matthias, 2020. "Long-term outlook for the German statutory pension system," Discussion Papers 22/2020, Deutsche Bundesbank.
    19. Caliendo, Frank N. & Gorry, Aspen & Slavov, Sita, 2019. "The cost of uncertainty about the timing of Social Security reform," European Economic Review, Elsevier, vol. 118(C), pages 101-125.

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    More about this item

    Keywords

    Pension reform; policy uncertainty; aging demographics; fiscal sustainability; Japanese economy;
    All these keywords.

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • J11 - Labor and Demographic Economics - - Demographic Economics - - - Demographic Trends, Macroeconomic Effects, and Forecasts

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